Foreign buying of U.S. assets surged

RachelKoning

JulieRannazzisi

CHICAGO (CBS.MW) - Total foreign acquisitions of U.S. securities surged to $387.7 billion in the first six months of the year as rallying U.S. stock and bond markets lured overseas money, according to the Securities Industry Association.

Second-quarter purchases were a record, the group said. Foreign investors were the single largest acquirers of U.S. bonds in the first half, exceeding that of U.S. investors.

Running at an annualized pace of $775.4 billion, 2003's total would exceed last year's record of $548.9 billion by more than 41 percent, the SIA revealed in a corrected foreign activity report. The group first reported securities in the first half of the year at $386.6 billion and an annualized pace of $773.2 billion.

The latest figures fuel conflicting arguments in the current account deficit debate among analysts as testimony both to confidence in the United States and the vulnerability that a dramatic foreign investment exodus would hobble the U.S. recovery.

Broad stock averages have continued their advance in the second half of the year, scoring their highest levels in more than a year and in the case of the Nasdaq
$COMPQ
a year and a half, in recent trading.

But the U.S. Treasury market has stumbled since its early-year advance as participants all but ruled out Federal Reserve purchases of Treasurys, mortgage-related hedging was reversed as interest rates rose and on bets the U.S. recovery will gain steam late this year and into next. Yields dwelling at 1958 lows in the middle of June also began to turn off some investors in favor of equities.

A benchmark 10-year Treasury yield
TNX, +1.27%
hit a 14-month high atop 4.60 percent earlier this month, which was a significant stride from June's 3.07 percent four-decade low, before settling back to current levels near 4.30 percent.

The industry group also detailed that foreign net purchases of U.S. Treasuries totaled $95 billion in the second quarter, agencies amounted to $59.4 billion, and corporate bonds to $72.2 billion -- all quarterly records.

In the second quarter, net purchases of U.S. stocks totaled $21.3 billion, the largest amount since the fourth quarter of 2001.

Net inflows from Japan to the United States total $76.5 billion, of which $57.1 billion went toward acquiring U.S. securities in second quarter 2003 alone. Purchases of Treasurys were more than $50 billion in the first six months of this year.

"If investors from Japan continue to acquire U.S. Treasurys at the current rate, they would more than double their previous record pace of $41.4 billion set in 1996," the SIA said.

But at least some Japanese funds have been repatriated in late 2003, analysts remind, lured by a 14-month high for the Nikkei stock average amid bets a sluggish Japanese economy is showing some life.

Others analysts, including the forex team at Merrill Lynch, have maintained that Japan, a perennial buyer of U.S. assets, is likely to view the cheaper bonds in the second half of the year as a buying opportunity.

Some economists remain nervous that the U.S. broad trade gap, including goods, services and investments, is kept from imploding only by overseas demand in U.S. assets.

In fact, the U.S. dollar continues to be nagged by concerns foreign investment flows won't match the $1.5 billion needed daily to fund U.S. appetites for foreign-made goods and keep the dollar stable even if the U.S. recovers at a modest pace in coming months. See Currencies.

Meanwhile, Chinese mainland net purchases of U.S. securities cooled in the second quarter to $17.5 billion from $23.5 billion.

U.S. stock activity by the Chinese was a net $42 million sold in the first quarter, shrinking to a net $4 million sold in the second.

The Chinese slowed their purchases of Treasurys, to a net $5.6 million in the second quarter from a net $14 million in the first.

Earlier this week, the Federal Reserve reported that foreign investments into the United States were running at annual rate of $959.6 billion in the second quarter of the year, up from $715.1 billion in the first quarter. Read related story.

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